'States should be allowed to access market directly'

TNNApr 8, 2005, 10.50PM IST

MUMBAI: State governments will adhere to greater fiscal discipline if they are allowed to access the market directly to meet their borrowing requirements, according to C Rangarajan, chairman to the Prime Minister's economic advisory council.

Currently, state borrowings are managed by the Reserve Bank of India (RBI) and the bonds issued carry an SLR (statutory liquidity ratio) tag, which improves the marketability of the papers.

The former RBI governor possibly meant that if states steps out of the comfort that RBI extends by functioning as their merchant banker, and enter the bond market like other entities, then states will be forced to move towards greater fiscal transparency and balancing of budgets.

Mr Rangarajan was addressing the state finance secretaries at the RBI central office on Friday. Besides, if state governments move on a path of fiscal correction, the market borrowings programme of the states will be sustainable and won't face difficulties in terms of eliciting the necessary subscription.

Like the Centre, the states must decide their annual borrowings programme within the framework of the respective fiscal responsibility legislations, he said.

Mr Rangarajan suggested that the overall limit to their annual borrowings from all sources should be supervised by an independent body like a loan council with representatives from the ministry of finance, Planning Commission, the RBI and the state governments. This Council may, at the beginning of each year, announce borrowing limits for each state, taking into account the sustainability considerations, Mr Rangarajan said. He also said that the grants should be delinked from loans in plan assistance, as these need to be determined on different principles.

The restructuring of state finances should aim towards pruning the combined fiscal deficit of states and Centre to 6% (from 10%) by '08-09. This will result in an increase in the aggregate savings rate, as well as an increase in government capital expenditure as a percentage of GDP.

And as aggregate investment rate rises, the growth will be stabilised at over 7%. The reduction in the revenue deficit by 4.5 % is to be achieved by an increase in the total revenue receipts by 2.9% and a reduction in total revenue expenditure by about 1.6%.

"We expect a positive growth dividend, as revenue deficits relative to GDP progressively fall," said Mr Rangarajan. This implies a fall in government dissavings and an increase in the overall savings relative to GDP.